We all have desires and goals we want to achieve. Saving for retirement, children’s education or buying a home is attainable by most of us. However, at the end of the month you may wonder where your money went and how you will ever reach your goals.

Regardless of your stage in life, income, or wealth, a financial plan helps you clarify and prioritize your goals and set objectives for reaching your goals.

These six simple steps will point you in the right direction.

Step 1 – Track Your Net Worth
Step 2 – Track and Manage Cash Flows
Step 3 – Establish Your Goals
Step 4 – Establish a Savings and Investment Plan
Step 5 – Cover Your Risks
Step 6 – Review Your Plan Annually

Step 1 – Track Your Net Worth

The net worth statement provides a picture of your financial position at a point in time. A net worth statement help you track your financial progress and can be used to establish a strategy to improve your goals and feel secure.

Your net worth is the total of what you own less what you owe. Your net worth statement helps you determine what your assets are and quickly you can access cash. A review of your liabilities will show how debt affects your worth and whether you have sufficient insurance coverage. The statement helps you identify problem areas and take steps to correct those problems.

Your net worth should be re-calculated annually and compared to the prior year if it is to provide any value.

Your net worth should increase annually. If your net worth is negative, then you must take steps to reduce debt, increase assets, increase investment income or revise your goals accordingly.

Step 2 -Track and Manage Cash Flows

Your net worth statement looks at a single period in time while your cash flow statement measures a period of time. The only way net worth can grow is if cash flows are positive or you have savings. If cash outflows exceed inflows, then action must be taken to correct the situation either be increasing income or reducing expenses.

Tips to improve cash flow:

1. Reduce expenses: Eliminate discretionary items to ensure there is a workable long-term plan. A budget worksheet or budget software can help you understand your expenses.
2. Restructure debt: Take a term loan, line of credit, or refinance your home and close un-needed high interest consumer credit card accounts.
3. Defer purchases of non-income producing assets: Defer the acquisition of non-income or negative cash flow asset acquisitions. Reduce, restructure, defer. This is the key is to reduce cash outflow and improve cash inflow.

The cash flow statement is used as a planning tool to look for opportunities to improve net worth.

Step 3 – Establish your Goals

The overall objective is to establish what you want and how you are going to get there.

What are your goals?

• Buy a home
• Take an exotic cruise
• Save for your retirement or you child’s education
• Buy a vacation home
• Purchase a pool
• Buy an exotic car

Sit down with your partner and commit to paper a list of what you want to achieve. Categorize short-term and long-term goals and rank them in order of priority. You may need to make revisions allowing more time for some things and less time for others. Look at your cash flow statement and flexible expenses to determine if expenses can be reduced or eliminated. Look at your investment and determine if repositioning assets can enhance investment income.

Step 4 – Establish a savings and investment plan

From your cash flow statement you will and goals you will see how much you will need to achieve your goals. It may be necessary to revise your budget and make adjustments to increase income or reduce expenses.

Any savings and investment plan should have the following elements:

• The goals must be realistic and attainable.
• Pay yourself first. Set up an automatic rep-authorized plan to divert funds into your savings.
• Avoid the use of consumer debt and avoid spending more than you make.

The reward for a disciplined and methodical approach to the plan is the attainment of your goal!

Step 5 – Cover your risks

Events occur in life that are uncontrollable are those things that can affect us financially. These include loss of employment, accidents, property damage, health and illness, or death. To effectively manage these risks:

Establish an emergency fund of approximately three months of income. A line of credit can be used rather than short-term investments that have lower rates of return. If unused, the line of credit costs nothing and your savings can remain invested in higher yielding investments.

Any risks that cannot be covered personally must be covered by passing the risk on to a third party such as an insurance company. The level of insurance needed depends on your financial situation.

Insurance needs analysis varies based on the type of risk and policies available.

Step 6 – Review Your Plan Annually

Situations change and you should review and update your plan annually to see how far you have come. Did your net worth meet it target? Were you able to meet all of your goals? What circumstances are different?

Review, update and revise your net worth statement, cash flow statement, goals, and risks annually. Make revisions as required.

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The Globe and Mail reported yesterday that MBNA has sent notices to all of its clients announcing changes to the way in which the minimum credit card payments will be determined. Moreover, the other credit card companies are expected to follow suit soon in order to comply with new federal regulations designed to create transparency.

According to the new rules, minimum credit card payments should increase. MBNA provides an example where a minimum payment of $185 would increase 66% to $307. The change in the minimum payment formula will ultimately reduce interest charges paid by consumers.

The new formula will take effect in August 2010.

Prepare Yourself For The Change

For those of us who pay our bills in full or make significant monthly payments above the minimum payment should not be adversely affected. Those Canadians who currently struggle making minimum monthly payments are facing tough times.

Now may be the time to look for a consolidation loan and get rid of your existing credit cards. If a consolidation loan is not available, you may have to seek a consumer proposal or at worst bankruptcy.

Tips To Reduce Credit Card Problems

While credit cards provide an excellent way to avoid bank fees by using the float, if not paid promptly, they can be expensive. Here are a few tips to avoid credit card problems:

1. Only have one credit card,
2. Pay your balance in full every month,
3. Avoid credit cards with annual fees,
4. If you have to carry a balance, seek out low interest credit cards,
5. Avoid rewards cards or points cards. These features often come at an additional cost by way of a higher annual fee.

To find out more about how to avoid credit card problems read Tips To Reduce Credit Card Debt Problems.

Share Your Thoughts

Are you going to be affected by these new credit card rules?

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The dreaded “B” word drums up a lot of emotions in people. Often budgets are associated with cost cutting, financial failure or even bankruptcy. However budgets are used by businesses and successful people to establish a spending plan and to map out their financial future.

Budgets are a useful starting point in establishing your financial plan but they are narrowly focused and typically only look at your expenses.

I like to establish a cash management plan that looks at cash flow needs over time. This cash flow plan can then be used to establish a strategy to meet your needs. The cash flow management plan will help you tie in your household net worth statement and net worth goals.

Cash Management Planning 101

In a previous article on net worth planning I showed how to prepare a household net worth statement.

The household net worth statement measures the value of what you own and what you owe at a single point in time. On the other hand, the cash flow statement tells you where your cash came from and where it went over a period of time.

Note that net worth can only grow if cash flow is positive or if you have savings. Savings are positive when the annual cash in flows exceed the annual cash out flows. The accumulation of savings is why we use cash management planning as one of the key financial tools.

If your savings over a period are not adequate to achieve your household net worth target, then steps must be taken to correct the situation either by increasing income or reducing expenses. If your adjustments still do not help, you must re-evaluate your net worth goal.

If you are generating savings, cash management planning can help you set a higher net worth target and then meet the target with higher savings. On the other hand, If you have inadequate savings techniques you can use to improve your cash flow include:

• Control your current expenses by restraining spending on discretionary purchases such as coffee at the local shop or buying lunch everyday at work.
• Restructuring your debts
  • Consolidating high interest credit card debt
  • Refinance your home to lower interest expenses or payments
  • Discard or discontinue credit cards
  • Defer big ticket purchases
• Reposition assets to improve cash flow by postponing the purchase of:
  • Non-essential consumer goods (i.e. that fur coat)
  • Non-income producing investments like gold, coins, or art
  • Negative cash flow investments in leveraged real estate or other investments requiring long-term periodic payments

Preparing A Cash Flow Statement

The starting point for cash flow planning is the cash flow statement. The statement looks much like a budget and if you have never done a budget before you will need your bank and credit card statements to determine your historical cash receipts and disbursements (I include credit cards because many times people substitute credit cards for cash).

Cash Flow Statement

Looking At Your Cash Flow Statement

The main objective of cash management planning is to find out how adequate your savings are to meet your net worth objectives. Net worth targets can be refined to include investment, educational and retirement funding objectives. Cash management planning helps achieve these goals systematically.

Cash flow planning helps you identify flexible (i.e. discretionary) expenses and fixed (or non-discretionary) expenses. It also helps you understand your situation and identify any excess spending and control cash outflow to a more desirable level. Note that the flow statement will not cover every single cost. Many of us have very large “other” out flows of cash that are unexplained.

If you have kept a monthly budget and stayed on target you are on the right track. However, the budget is only a part of the equation and the key to long term success is the development of a systematic savings strategy. The savings strategy includes specific plans to generate required savings, systematically direct savings to specific financial goals.

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The following is a guest post from Sandra at the UK blog, Thinking Money.

Quit worrying about credit card fraud and do something about it.  Here are seven things you can do to minimize the chance that somebody will commit credit card fraud on you.

1)      Check your credit report at least once a year.  Identity theft can be a much more expensive theft than straight away credit card theft.  This is because most countries have in effect limits on how much a credit card consumer must pay if their credit card is stolen.  But if somebody else, pretending to be you, takes out a credit card in your name and then rings up charges without paying for them, the impact on your credit report can be a pain to fix.  

2)      When shopping online, use strong passwords that are hard to discover.  Routinely update your shopping passwords with major accounts online.  Many of these accounts will keep your credit card information to facilitate shopping.  That’s fine as long as you are the one shopping. 

3)      Shred all unused credit card applications that come in the mail.  This prevents somebody from dumpster diving for other people’s credit card applications and sending them in.   

4)      Request that your bank send you new cards even if your current ones have not expired.  This limits the usefulness of any credit card information collected against you.  This way even if your credit card number has been stolen without your notice, the number will not be valid anymore with the credit card company. 

5)      Carry a copy of the phone numbers for the credit cards in an easy to get to place.  This way you can call them as soon as you discover that your credit cards are lost or stolen.  If you report your cards missing before the first charge is made on them, you may be able to prevent any authorized charges to the account.

6)      Use up to date virus software on your machine at home.  This will reduce the chance that an information swiping or key logging virus finds its way on your machine.

Keep the number of cards you have active and/or on your body at an absolute minimum. With each account you have open, you increase the chances that somebody will steal your account number.  So, if you have many cards, get rid of as many as you can.  Likewise, when you go shopping, limit how many credit cards you carry.  Long gone are the days of the wallets of accordion credit cards.  Keep up with the times 

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So you’re either just starting your Christmas shopping or are nearly finished. You may have placed yourself on a budget and are sticking to it, but for many, Christmas causes cash flow problems and reliance on credit cards.

At this point, you may be asking yourself why I am writing this now? Well, if you begin thinking about next Christmas now, you can plan and save to avoid the use of debt when you begin Christmas shopping next year.

You don’t need think about what to buy, but you certainly can start to think about how much to spend and then save accordingly.

6 Simple Steps To Start Next Christmas

1. Make a list of people you buy gifts for – Who are the people you buy gifts for? This can include your spouse, parents, siblings, friends and co-workers.
2. Segment the list – Be honest, you will probably spend more on family than you will on friends and co-workers. Your list can be split up into those who you will spend large amounts on and those you will spend a nominal amount on.
3. Attach a dollar figure to each person – Put a value on the gift. This not only helps you budget your spending, but it will help you figure out how much to save.
4. Total the amount! – How much do you plan to spend for Christmas? Is the number reasonable? Can you really afford it? You may need to revisit your list or the amount you plan on spending.
5. Create a savings plan – You might take the total amount you plan on spending and dividing it by 12. For most people, this is the simplest way to go – It is not perfect but for a quick calculation, it will do the trick.
6. Begin saving – Open a separate high interest savings account and begin making automatic transfers, every pay day or every month. By the time Christmas comes, you should have enough without having to use credit cards!

Merry Christmas!

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The annual rush to save for retirement is soon upon us. Despite the efforts of financial planners and investment advisors alike, a vast majority of Canadians continue to make their annual RRSP contribution all at once right before the deadline.

Boomers Are Retiring

As the population of Canada ages, there is a shift from away from moving money into retirement savings to thinking about structuring retirement income. As we save for retirement, we ask, “How much do I need to save?” As we approach retirement or begin retirement, we start to ask, “Where will my money come from?”

Start With Spending Goals

There is a tendency to start with income first. In fact, you are far better off starting with establishing your spending goals or costs of retirement first.

Budget – This dirty little word can carry a lot of negative feelings and emotions. However, I encourage you to think about your costs in retirement. What will be your regular expenses? Property tax, utilities, telephone, groceries are all regular expenses.

Some expenses go away – If you have planned everything well, you may not have a mortgage or will pay it off within a few years in retirement.

Plan for fun – If you have dreamed of taking vacations in retirement, you can expect to have some additional costs in the early years. I have heard than many who are newly retired will spend more in the first few years even if they have not planned for it. Anticipate some additional expenses in the first few years.

Once you know what you will spend in retirement, you can now look at filling the need with income.

Know Your Retirement Income

You should begin by taking stock of where your retirement income will come from. Some of this income will come from a government sources, savings, or private pension plans. Here are some of the sources of income you may receive in retirement:

Canada Pension Plan (CPP) – If you have worked all of you life in Canada you will receive some form of CPP. As of May 2009, the average annual CPP benefit was just under $9,800 per year (the maximum was $13,270).

Old Age Security (OAS) – If you have lived in Canada for 40 years since age 18, you may be entitled to OAS. If you annual income is below $66,000 you would be entitled to the full benefit of $10,905 per year. If you have been in Canada for less than 40 years, the rate is lower and if your income exceeds $66,000, your OAS will be reduced and eliminated by $107,000.

Private Pensions – If your employer sponsored at defined benefit pension plan, you will know exactly how much you will be paid in retirement. If the plan was a defined contribution plan, you may be able to fix your income by purchasing an annuity.

Retirement Savings Plans – Including RRIFs, LIFs and LIRAs can all be used to generate income at retirement. You have a couple of tax-deferred options where either you can draw a percentage from your account annually or you can use the funds to purchase an annuity to provide income for life.

Income for retirement can also come from other sources such as from non-registered (open) accounts, or from reverse mortgages.

Review & Reassess

Once you know how much you need and where the money will come from, its time to put it together. If you do not have enough, it is time to re-evaluate your spending goals. Perhaps you can trim some expenses, downsize the home, or work a little longer in retirement.

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Do I really need life insurance? Many of us hate to think about our own death. But what would happen financially to your family if you were to pass away?

Would your family be able to cope without your income? Will your family have to move out of their house? Will your children be able to attend university?

These are just a few of the questions we need to ask ourselves. The simple truth is that determining ho much is needed and for what can usually be quantified.

1. Funeral expenses
2. Legal fees (to settle your estate)
3. Income tax liability (capital gains at death)
4. Probate fees
5. Loan repayment
6. Mortgage repayment
7. Create an emergency fund for your family
8. Fund your children’s education
9. Pay bequests to family, friends, or to charity
10. Replace your income for a period of time (this is a present value calculation)

What Do You Insure?

Do you have life insurance? What have you included in your life insurance plan? Have you left anything out?

Share your thoughts with others by leaving a comment.

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What would you do if a close family member or friend approached you and ask for a loan or for you to co-sign a loan?

A friend called me the other day asking what to do: Someone had asked for help in the form of a co-signed loan. Apparently, this person had run into some financial difficulty and needed a loan to pay the storage company to get his stuff back.

My friend had no idea how to respond.

If the Bank Won’t Lend Why Should You?

Ding-Ding-Ding! That’s the sound of a warning alarm.

Can’t get loan on his own … Can’t get his stuff out of storage because he could not pay the bill.

If this person cannot pay the storage bill, how will they make loan payments?

Banks have lending down to a science. They know who is good with money and who is not: Nine-times-out-of-ten, they are right. Banks may take on a loan where the person may not have the best credit history, but that person will certainly pay more interest.

Banks are also making an investment in the loan. They want to ensure they get a return on that investment by doing dome diligence on the borrower and avoiding potentially bad investments.

Banks have diversified loan portfolios. They lend to many people at the same time and the loss from a single default is reduced because of the many other’s who continue to pay.

What Do You Get Out Of the Deal?

Certainly, by co-signing or guaranteeing a loan you are assuming risk. If the person defaults on the loan, you will be forced to assume the payments or settle the debt. If this person cannot get a bank loan, then the risk of default is already high.

When you take on risk, you should be compensated for it. You will not be paid for co-signing or guaranteeing, but you might be out of pocket if the person defaults on the loan.

I was reading about another situation recently where someone had guaranteed a large loan for a family member and put their house up as collateral. This close family member failed to make payments shortly after the loan was advanced and now this person may have to sell their home to satisfy the debt.

What To Do If Someone Asks For A Loan Or Guarantee?

First, ask yourself if this person is really your friend. Personally, I do not lend money to anyone and if someone were to ask me for a loan, I would be seriously put off.

Second, be direct and honest. Tell them you do not lend money to friends. There is no need to justify yourself.

Finally, offer other support or help. You might not lend or guarantee a loan, but you might be able to find another lender for them or, put them in touch with a consumer credit counsellor.

What Would You Do?

Has someone asked you to co-sign or guarantee a loan, put up collateral for a loan, or outright asked you for money? How did you handle it and what was the result?

Share your experience by leaving a comment.

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Join a Rewards Program – Air Miles, Aeroplan, or other types of reward programs can offset future purchases. When selecting a reward program, select a program that do not charge you an annual fee.

Go Green With Diapers – If you have babies or toddlers you know that disposable diapers cost a small fortune. A box of 120 can cost as much as $35 and will last about a month. Disposable diapers are a little more costly up front, but you can flush and wash the rest.

Extra Phone Services – Consider eliminating extra phone services you don’t use such as call waiting, voicemail, or long distance plans.

Shop For Insurance – Last year I switched my house insurance to the same company that provides my car insurance. Not only was the overall policy cheaper, I also got an additional 5% discount on my car insurance for bundling.

Reduce Digital Cable Packages – Do you have digital package channels you don’t use. Consider switching to a package with fewer channels.

Think In Terms of Needs – We all need food, shelter and clothing (in that order!). Needs are things we desire but don’t require for survival.

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I was reading an article in Money Sense about 10 numbers you must know. This got me thinking about the numbers and rules of thumb I use in my daily practice and I searched around for some new ones.

Home Ownership

3.5 – This is roughly the amount of house you can afford on your gross annual income. If you make $100,000 per year, the most house you can afford is ideally $350,000 assuming a 20% down payment and a mortgage of $280,000 over 25 years. With a mortgage at 7%, the monthly payments would be $2,000 a month. Once you add utilities, property tax and insurance your using roughly 30% of your gross income (see 32% below).

32% –   This is the percentage of your gross income you can afford for a home. One-third of your pre-tax income is devoted to paying your rent or mortgage, property tax, house insurance and utilities. Any more than that and you are in danger.

Buying A Car

20/4/10 – I found this one at Get Rich Slowly. These numbers represent the amount of car buy, finance and drive. You should put at least 20% down, finance for no more than 4 years and drive the car for at least 10.

Credit And Debt

750 – This is the ideal credit score to obtain a loan. The credit score (or FICO score) is a measure of your ability to service debt. A score of 300 is really bad and a score of 900 is perfect.

Money Sense suggests that in order to improve your score, keep the balance on your credit card below 35% of the limit, maintain your lines of credit to below 50% of the limit, and of course pay all of your loans and bills on time.

26% – This is the return on investment you’ll get by paying off your credit cards. You see, you make your credit card payments with after-tax dollars. So if your tax rate is 30% this means you need to earn 26% before tax to pay-off that 18.5% interest on your credit card.

6% – 8% – This a reasonable rate of return you can expect from an balanced investment portfolio.

What Rules Of Thumb Do You Use?

Share your rules by leaving a comment.

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